S&P 500 drops 1.6%, Nasdaq slides 2.2% as AI spending fears deepen

Wall Street suffered its worst session in a month as the Federal Reserve held rates steady and AI-linked stocks extended their selloff on mounting concerns about the cost of the technology buildout.

The S&P 500 fell 1.6% to 5,234, its lowest close in a month, while the tech-heavy Nasdaq Composite slid 2.2%, bringing it about 9% below its June record high. The Dow Jones Industrial Average lost 2.2%, and the Russell 2000 dropped 2%. Futures markets had signaled the magnitude of the decline, with S&P 500 futures down 1.60%, Nasdaq 100 futures off 2.20%, and Dow futures falling 2.18% at the New York close.

"The Fed held pat, as expected. The bigger question now becomes how much pressure they will have to hike in September," said Ryan Detrick, chief market strategist at Carson Group. "Inflation is running hot and with surging crude oil, the market expects the next hike to indeed be in September."

The Federal Open Market Committee left the benchmark rate in the 3.50%-3.75% range, a decision that drew dissents from three of the 12 members who "preferred" a quarter-percentage-point increase. The CME Group's FedWatch tool showed traders pricing in a 36% likelihood of a rate hike at next week's meeting, up from about 12% a week earlier, according to data from the July 23 session.

Technology stocks led the decline as AI-related capital spending continued to dominate investor attention. Meta Platforms dropped 4% in extended trading after the social media company raised its 2026 capital expenditure forecast to between $130 billion and $145 billion, up from its prior range of $125 billion to $145 billion. Microsoft edged up 0.6% after the bell after topping Wall Street estimates for quarterly cloud revenue growth, a sign its AI infrastructure spending was generating returns. Fed Chair Kevin Warsh told reporters that AI spending was laying the groundwork for future growth, a comment that did little to calm near-term valuation concerns.

The selloff extended to chipmakers, with South Korea's SK Hynix falling 10% after its quarterly profit more than doubled but still fell short of elevated investor expectations. AI-related semiconductor stocks added to recent losses that have dragged the Nasdaq 100 down 11% from its June record high.

The 10-year Treasury yield rose four basis points to 4.71%, its highest since January, as traders priced in a greater chance of tighter monetary policy. The U.S. dollar index gained 0.3% to 101.44, while Brent crude futures traded near $100 a barrel after earlier touching $102, adding to inflation concerns. Gold futures declined 2.5% to $4,050 an ounce.

The simultaneous decline across all major equity indices pointed to broad-based selling pressure rather than sector-specific weakness. With the Fed's next meeting scheduled for late September and inflation data due in the interim, the path for equities hinges on whether AI spending translates into earnings growth fast enough to justify the outlay.

This article is for informational purposes only and does not constitute investment advice.